Business Context and Reporting Period
Omega Healthcare Investors, Inc. is a self-administered healthcare REIT operating through OHI Healthcare Properties Limited Partnership. The Company invests primarily in skilled nursing and other long-term healthcare facilities through triple-net leases, mortgages and other investments in the United States and United Kingdom. This combined Form 10-Q covers the quarter and nine months ended September 30, 2017; financial statements are unaudited.
- Portfolio: 1,012 healthcare facilities in 42 states and the U.K., operated by 77 third-party operators.
- Approximately 99% of real estate investments were related to long-term care facilities.
- Omega owned approximately 96% of Omega OP at September 30, 2017.
Key Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Operating revenues | $219.6 million, versus $224.6 million | $687.2 million, versus $666.3 million |
| Income before other income and expense | $(88.2) million, versus $124.3 million | $192.1 million, versus $363.1 million |
| Net income | $(137.5) million, versus $82.1 million | $39.8 million, versus $253.5 million |
| Net income available to common stockholders | $(131.7) million; $(0.67) per diluted share | $38.0 million; $0.19 per diluted share |
| NAREIT FFO | $(46.8) million, versus $162.6 million | $285.1 million, versus $488.5 million |
| Net cash provided by operating activities | Not separately reported | $430.3 million, versus $457.2 million |
The third-quarter operating margin before other income and expense was approximately negative 40%, compared with approximately 55% in the prior-year quarter, primarily because of impairments. The nine-month margin was approximately 28%, compared with approximately 54% in the prior-year period. Net margins were approximately negative 63% for the quarter and 6% for the nine months.
- Third-quarter operating expenses were $307.9 million, including $194.7 million of direct financing lease impairments, $17.8 million of real estate impairments and $11.9 million of uncollectible-account provisions.
- At September 30, total assets were $8.9 billion, total equity was $3.9 billion and debt was $4.6 billion, equal to approximately 54.1% of total capitalization.
- Cash and cash equivalents were $24.3 million, down from $93.7 million at December 31, 2016. Restricted cash was $10.6 million.
- Net cash used in investing activities was $400.0 million, including $345.3 million of real estate acquisitions and $69.4 million of construction investments.
- Net cash used in financing activities was $100.0 million. Dividends paid to common stockholders totaled $373.4 million for the nine months.
- Dividends declared were $0.64 per share for the third quarter and $1.89 per share for the nine months. The Company declared a $0.65 per-share dividend payable in November 2017.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined $5.0 million, primarily because the Company recognized no direct financing lease revenue from Orianna. Rental income and other investment income partially offset the decline.
- Nine-month revenue increased $20.8 million, supported by acquisitions, lease amendments and higher other investment income, partly offset by lower direct financing lease and mortgage interest income.
- Third-quarter net loss increased substantially because of $194.7 million of Orianna-related direct financing lease impairments and higher uncollectible-account provisions.
- Nine-month net income declined $213.7 million from the prior year, while NAREIT FFO declined $203.4 million.
- Debt increased from $4.4 billion at December 31, 2016 to $4.6 billion. The Company replaced or amended several credit facilities and issued $550 million of 4.75% senior notes due 2028 and $150 million of additional 4.50% senior notes due 2025.
- The Company redeemed its $400 million of 5.875% senior notes due 2024 and recorded approximately $16.5 million of related redemption costs and write-offs.
- 2017 acquisitions totaled approximately $372.7 million for 45 facilities, including 18 U.K. assisted living facilities and 24 Indiana and Texas skilled nursing facilities.
Outlook, Risks, Contingencies and Unusual Items
- Orianna: The Company recorded a $171.9 million allowance covering 38 Southeast facilities and recognized total direct financing lease impairments of $198.0 million for the nine months. Orianna had not satisfied contractual payments, and the Company was evaluating sales, operator transitions and possible legal action.
- Management expected Orianna’s annual contractual rent to decline from approximately $46 million to $32 million-$38 million after transition of facilities.
- Other troubled operators: Three operators were approximately 90 days or more past due. Signature Healthcare’s past-due rent was substantially supported by a letter of credit exceeding $9 million and principal guarantees. Another operator was permitted to defer up to 23% of contractual rent during the fourth quarter, with management expecting a return to full contractual rent in January 2018, subject to conditions.
- Eight facilities with a net book value of $17.3 million were classified as held for sale, with sales expected within twelve months.
- Management stated that available operating cash flow, credit-facility capacity and expected mortgage-payoff proceeds should be adequate for operations, debt service, dividends and planned investments over the next twelve months. The filing does not provide a single clear amount for total undrawn borrowing capacity.
- Key risks include operator liquidity and bankruptcy, government reimbursement reductions, healthcare regulation, occupancy and operating performance, interest rates, access to capital, asset-sale execution, changes in real estate values and continued REIT qualification.
- The Company remained in compliance with its debt covenants. Litigation is described as arising in the ordinary course, with management not expecting a material adverse effect; however, one top-ten operator was in settlement discussions with the Department of Justice.
- Management stated that the adoption of ASU 2014-09 was not expected to have a material impact, while the impact of the future lease and credit-loss standards was still under evaluation.
Most Important Facts for Investors to Verify
- The ultimate recoverability of the $337.7 million net Orianna direct financing lease investment and the potential for additional impairments or rent reductions.
- The timing and economics of transitioning, selling or re-leasing Orianna facilities.
- The collectability of receivables from Orianna, Signature and the third operator placed on a cash basis.
- Actual undrawn capacity, interest-rate exposure, refinancing requirements and compliance with debt covenants.
- Whether operating cash flow and recurring funds available for distribution adequately cover the dividend after operator disruptions and capital needs.
- The effect of Medicare, Medicaid and other reimbursement reforms on tenant coverage ratios and rent-paying capacity.
- The assumptions supporting Level 3 fair values, real estate impairments and the $171.9 million Orianna allowance.